The Fourteenth Banker Blog

July 15, 2013

Two and Half Years

Filed under: Running Commentary — thefourteenthbanker @ 10:39 PM

It has been quite a while, hasn’t it?  The hubbub has died down.  The banks mostly survived.  The government talked a lot and did a little.  The lobbyists brought home a lot of loot.  Not much has changed but the crisis seems to have subsided.  It is now just a lot of little people who have not done so well.  We could have done better.  But we are still here.  Are you still here?


February 1, 2011


Filed under: Running Commentary — thefourteenthbanker @ 7:09 PM

Today is February 1st and I am faced with a conundrum. It is time to transition to a new role. I started this blog last Spring when we were in the thick of debate on Financial Reform.  I had two intents. One was to make a difference in the debate by adding an insider’s perspective on the industry and many of its pronouncements. My second intent was to just do something every week to move towards my goal of personal integrity in my life. My employer was stealing my integrity every day in the way I and others were required to respond to the pressures coming from the most senior management. Of course, they would deny this and say that intermediary managers “misinterpreted” what their intent was. At various times, I would register my objections and be faced with looks of incomprehension. Why would a successful manager sabotage a career by objecting to our commonly accepted practices, particularly those that were making us look good on the internal metrics and making us such big bonuses?  What craziness!

So I kept reading and kept writing. There is a whole world of information out there regarding what is wrong with our system. Every day I could read for hours and post for hours if I did not have a job and a life to lead. What a fantastic experience though. What a privilege to discover so many people whose eyes and minds are open to alternative perspectives, who are able to shed the propaganda. The official narrative continuously drones from the seats of power like the barely perceptible hum of machinery, the background music in a movie, or the soft chords as a preacher winds up his sermon.  Except the official narrative never ends.

How proud I am of Simon Johnson and James Kwak, Bill Black and Michael Hudson, Yves Smith, Tyler Durden et al, Barry Ritholz, George Washington, Edward Harrison, George Mobus, David Stockman, and a hundred others whose posts have graced these pages. Keep fighting the good fight.

To all my readers and commenters, thank you so much. You have added wisdom and reality to this conversation. Thank you Jerry, Tippy, Sandi, Lucy, Eric, Lawrence, Ella and the many others who have stopped to add to the conversation.

There is a downside to being anonymous. There is really nowhere to go with it. I have thought about writing a book or going on television, and have been invited many times, but to do so would be to bring longer term problems for a short term splash. I have withheld the most damning details of corruption that would reveal my identity, and in doing so have done my employer a favor. So I guess I have to say Bradley Manning is a bigger figure than I. But he is in solitary.

A funny thing has happened on this journey. While I have been clear with my truth in this anonymous blog, I have become clearer with my truth in the rest of my life. I have quietly begun to live the life of a reformer. My life is richer as a result.

So while I will leave this blog up, and may return to it if the situation warrants. I am moving on with my life. You may hear of me again in the public square, but it won’t be as the Fourteenth Banker, it will be a real person with a real name. I have decided to leave my big bank to look for honest work. This decision was mostly made of course at the time I started the blog, and was confirmed by what I learned as I wrote. How could I continue to work for an organization that sort of lumbers cluelessly along seeking its own survival by whatever means are convenient with no moral considerations?

I am looking forward to building things. Tearing down has its place. But until we build something new it is mostly just talk. I hope all the readers and all the bloggers and all the professors out there will consider this, we need to harp on the government to create conditions under which new things can be built. We must democratize our economy, we must create conditions that create enterprises that create jobs. We must elevate new kinds of leaders so that the old kinds become irrelevant.

My conundrum is this. Even while I have posted little over the last month, thousands have continued to visit the site. You make me want to keep going, but my best use is not to do so. If I blog again, it must be as me. If I speak, it must be as me. If I act, it must be as me. It will be as me.

Peace to all, no exceptions.


January 19, 2011

Institutional Deeds, Personal Choices

Filed under: Running Commentary — thefourteenthbanker @ 11:55 AM

H/T Credit Writedowns for this piece addressing causation of our economic malaise. The gist is that the problem is neither the business cycle nor structural imbalances.  Quoting Harold Meyerson of the Washington Post:

This grim new reality has yet to inform our debate over how to come back from this mega-recession. Those who believe our downturn is cyclical argue that job-creating public spending can restore us to prosperity, while those who believe it’s structural – that we have too many carpenters, say, and not enough nurses – believe that we should leave things be while American workers acquire new skills and enter different lines of work. But there’s a third way to look at the recession: that it’s institutional, that it’s the consequence of the decisions by leading banks and corporations to stop investing in the job-creating enterprises that were the key to broadly shared prosperity.

While I agree with this premise, we need to share the blame a little more broadly. Large banks and corporations are filling a vacuum. Yes, they help create the forces that create the vacuum, but nevertheless it is our inability to govern ourselves politically, financially, or consumptively  that allows the collective to go down a path that in retrospect was foolish. We did more in an intentional fashion to build the export machines of Japan and Germany than we did to build our own. We allowed other nations to be more frugal and save and invest while we spent and borrowed. We allowed our education system to become mediocre for a country of our prosperity. We let the free market misallocate our resources while China had an industrial policy that has created a relative competitive advantage in manufacturing that will be very hard of us to rebalance. Let me come back to culpability.

CR digs deeper on changes in family income over the last 60 years. Basically we had 30 years of income growth that was across the spectrum of income levels. Then, for the last 30, we have had disproportionate income growth among the very wealthy and relative stagnancy among the vast majority.

For thirty years after World War II the wealth of the country increased in a balanced manner. The average income containing the greater contribution from the top earners of the day, grew at a rate very similar to the income growth of the broader population, represented by the median.

Yes there were “fat cats” and they had significantly larger incomes than the bulk of the population. And these top incomes grew over those three decades, but at almost the same rate as the majority of the populace.

Then something happened. From 1979-2009 it appears that the American pie suddenly got smaller. In the later three decades the real median income growth was less than 10% of the rate seen from 1949 to 1979. And as the pie got smaller, the fat cats took a much larger share. The average income grew at a rate 254% that of the median income. You might say that, as the cow gave less milk, the top of the economic ladder skimmed more and more cream off the top.

Meyerson identifies the force majuere to be corporate America:

Our multinational companies still invest, of course – just not at home. A study by the Business Roundtable and the U.S. Council Foundation found that the share of the profits of U.S.-based multinationals that came from their foreign affiliates had increased from 17 percent in 1977 and 27 percent in 1994 to 48.6 percent in 2006. As the companies’ revenue from abroad has increased, their dependence on American consumers has diminished. The equilibrium among production, wages and purchasing power – the equilibrium that Henry Ford famously recognized when he upped his workers’ pay to an unheard-of $5 a day in 1913 so they could afford to buy the cars they made, the equilibrium that became the model for 20th-century American capitalism – has been shattered. Making and selling their goods abroad, U.S. multinationals can slash their workforces and reduce their wages at home while retaining their revenue and increasing their profits. And that’s exactly what they’ve done.

Yes, this is what they have done. And “they” are responsible. Yet, “they” are a reflection of us. “They” have filled the vacuum that we left for them. Granted, we stupidly did not know that this is what they would do.

So now we stand at a point in time. The headlines of the last few days have shown that our largest banks have a big interest in Facebook and Groupon. These are quick scores. They are to be sold to investors that are also looking for quick scores. The banks skim the fees and the investors look for a fast bounce and then get out before the next technological innovation, leaving the slow witted holding the bag while the company valuations eventually decline.

Are you powerless over this allocation of resources? No. These allocations of resources are based on anticipated revenue streams from the participation of the masses, the shrinking middle and growing underclasses in spending their time and resources reflexively on what these services promote. I am not saying they are all bad? They are a reflection of us. Our desire to communicate and affiliate is not a bad thing. But is our way of going about it the best way? Is a ‘not bad’ thing the same as a good thing?

What could you do intentionally to change your future? I have no ill-will for Groupon or its founders. But I promise you that if there is a net 20% decrease in subscribers, Wall Street will not allocate those resources that direction. If instead you buy a small solar panel, Wall Street will allocate resources in that direction.

Let’s begin making conscious choices to make our future better.

January 15, 2011


Filed under: Running Commentary — thefourteenthbanker @ 5:20 PM

Does humanity have the ability to be intentional in its evolution?  Consider this.

Forcing consumers to use domestically produced ethanol is one of the single biggest boondoggles ever committed by the corrupt brainless twits in Washington DC. Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3rd world countries.

The grand lame duck Congress tax compromise extended a 45-cent incentive to ethanol refiners for each gallon of the fuel blended with gasoline and renewed a 54-cent tariff on Brazilian imports. The extension of these subsidies, besides costing American taxpayers $6 billion per year, has the added benefit of driving up food costs across the globe, causing food riots in Tunisia, and resulting in the starving of poor peasants throughout the world.

What are the economics of Ethanol?

Ronald R. Cooke, author of Oil, Jihad & Destiny,created the chart below to estimate the true cost for a gallon of corn ethanol. Cooke describes a true taxpayer boondoggle:

It costs money to store, transport and blend ethanol with gasoline. Since ethanol absorbs water, and water is corrosive to pipeline components, it must be transported by tanker to the distribution point where it is blended with gasoline for delivery to your gas station. That’s expensive transportation. It costs more to make a gasoline that can be blended with ethanol. Ethanol is lost through vaporization and contamination during this process. Gasoline/ethanol fuel blends that have been contaminated with water degrade the efficiency of combustion. E-85 ethanol is corrosive to the seals and fuel systems of most of our existing engines (including boats, generators, lawn mowers, hand power tools, etc.), and can not be dispensed through existing gas station pumps. And finally, ethanol has about 30 percent less energy per gallon than gasoline. That means the fuel economy of a vehicle running on E-85 will be about 25% less than a comparable vehicle running on gasoline.

Real Cost For A Gallon Of Corn Ethanol

Corn Ethanol Futures Market quote for January 2011 Delivery $2.46
Add cost of transporting, storing and blending corn ethanol $0.28
Added cost of making gasoline that can be blended with corn ethanol $0.09
Add cost of subsidies paid to blender $0.45
Total Direct Costs per Gallon $3.28
Added cost from waste $0.40
Added cost from damage to infrastructure and user’s engine $0.06
Total Indirect Costs per Gallon $0.46
Added cost of lost energy $1.27
Added cost of food (American family of four) $1.79
Total Social Costs $3.06
Total Cost of Corn Ethanol @ 85% Blend $6.80


The 107 million tons of grain that went to U.S. ethanol distilleries in 2009 was enough to feed 330 million people for one year at average world consumption levels. More than a quarter of the total U.S. grain crop was turned into ethanol to fuel cars last year.

So what is going on in the rest of the world? According to this journalist, we are getting to the point where there will not be enough food, period. It is not a matter of surpluses in one place and shortages in another. We are looking at the possibility of shortages, period.

So is our ethanol policy wise? Or is it a result of the power of politics and business?

Do we have the ability to evolve and be intentional to bring about change in these power dynamics and institute sensible policies?




January 10, 2011


Filed under: Running Commentary — thefourteenthbanker @ 7:26 PM

I just want to share a simple concept that underscores the nature of mega-banking today. For years the banks have suffered from significant customer attrition, that is, customers that leave. Years ago this was a matter of some concern.

However, in the 2000’s, the largest banks achieved dominant distribution and scale advantages which, along with the TBTF cost of funds subsidies, made business production relatively easy. Now, I am not commenting on the quality of much of that business. I am just saying it could be acquired, revenues booked, and bonuses paid.

So while the actual figures would differ at each bank, let’s say you acquire new retail customers equal to 30% of your book and lose customers equal to 20% of your book.  That would be a net gain customer gain of 10%.

Here’s the kicker. If you could bring that production in, but focus the customer attrition on the least profitable customers, you could grow earnings at more than 10%. Voila, lots of book profits to pay bonuses on. Once you squeeze the maximum profits out of a client, if there is not much else to be had, you just treat the client poorly and if they leave, so what? Retention efforts are focused on the highest monetary value clients and the rest are left to mostly self-service through what are called the “least cost” channels.  These are internet, offshore 800 numbers, and getting shuffled away from overworked branch staff.

The customer has no value as a human being, but is just an economic widget.  So if you feel widgetized, it was probably intentional.

Why do I bring this up today? I have some accounts at a bank and would be a reasonably profitable customer for them. Occasionally I try to change something to simplify or optimize or to set something up for my kids. Every time I do this, once a year or so, my “packaged account” gets modified and somehow one of the accounts is left out of my list of free accounts. Then I get hit with a fee. It is the systems that do it. I either have to go to great trouble to get a refund, or just live with it. So if I, probably in the top 20% of their retail customers as far as balances go, experience this, I hate to think what happens to the other 80%. I suppose they have the same problems but can’t get the refund at all.

January 9, 2011

Simon Johnson on Bill Daley Appointment

Filed under: Running Commentary — thefourteenthbanker @ 12:55 PM

Simon wrote a direct and balanced response to the appointment of Bill Daley. Here is the problem as he sees it, with a focus on systemic risk:

Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.  They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent.  The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors.  This lets them stay big and – amazingly – get bigger.

In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP.  This is up from before the crisis – assets in the big six at the end of 2006 were only about 55 percent of GDP.  And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.

And what do we get as a society for having a massive “bet” on these banks?

No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years.  The social costs of these banks – and their complete capture of the regulatory apparatus – are apparent in the worst recession and slowest recovery since the 1930s.

As regards the appointment itself, it raises this question:

This is not a left-right issue – again, look at the list of people who co-signed Professor Admati’s recent letter to the Financial Times.  This is a question of technical competence.  Do the people running the country – including both the executive branch and the legislature – understand economics and finance or not?

If the country’s most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen?  Yet our political leadership brush aside concerns about the way big banks operate.  Why?

And for the rest of us, here is the issue.

Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector.

If I slip into a fantasy for a moment, I can picture a patriot in Bill Daley’s position stepping up to the moment and saying that from his stint in the financial sector, he now has a full grasp on the dysfunction in the banking system. And that as a matter of national priority, the President intends to lead a continued and informed effort to both dismantle the current structure and build a constructive structure in its place. End of fantasy.



January 7, 2011

So Bill Daley, Who’s Your Daddy?

Filed under: Running Commentary — thefourteenthbanker @ 7:26 AM

Yesterday President Obama heralded his newly appointed Chief of Staff, to great fanfare from the Republicans, US Chamber of Commerce, Wall Street Journal and others. According to the Wall Street Journal,

The selection of Mr. Daley shows that the president is more concerned with reaching out to the independent voters and to the Republicans who now control the House and have greater numbers in the Senate.

Per CNN,

Daley is the son of legendary Chicago Mayor Richard J. Daley and brother of the city’s current mayor, Richard M. Daley. He runs Midwest operations for the investment bank JP Morgan Chase, and his appointment is expected to help patch up Obama’s frosty relations with the business community after nasty battles over health care reform, taxes and government regulations.

So I am open-minded about this. Clearly Obama needs a change in program and needs someone who can reach across the aisle. But reaching across the aisle is not the same as capitulating.

Even the Huffington Post reporting is fairly sanguine on this.

Daley, the son and brother of Chicago mayors, has always been the Inside Daley, the one who deals quietly with the powers that be in the city and country — the brokers of money, commerce, family and tribal politics.

Daley is an ancestral Democrat, which means that he believes in the government’s role in helping people survive and live a decent life. He is an Irishman through and through, with a fierce faith in friends and loyalty. He is a big-city guy, at home in big-city haunts.

But he is not an ideologue of the left or right. He helped Bill Clinton pass free-trade agreements, even though Democratic union bosses hated them. Now a banker, he opposed some provisions of the bank-reform bill. He also expressed skepticism about the political and substantive wisdom of Obama’s spending a year on health care reform. He’s not for government for government’s sake.

The question for Daley is “who’s your daddy?” The revolving door between Wall Street and Washington power elites is still revolving. His predecessors have proven to be lap-dogs. As a big bank insider, Daley knows. He knows the games being played. He knows the scare tactics used to manipulate Washington for what they are, scare tactics designed to keep the status quo. He knows the business tactics and the business ethics. He knows the compensation structure and what it incents. He knows what management really cares about. He knows why executives shun shareholder empowerment. He knows why they offshore so many jobs. He knows why trading operations are housed where they are and how trans-national banks play the regulatory arbitrage game globally. He knows if the books are cooked. He knows if Primary Dealers get a heads up on Fed market actions and why they win in trading virtually every day, whichever way the markets move. He knows if they trade against their customers. He knows why they fight transparency. He knows why they fear Elizabeth Warren and may attempt to castrate her budget.

With this knowledge comes a greater responsibility.

Our financial system is past its prime. It is not longer suitable for the evolving society. So will Daley stand for the entrenched interests, or muster the courage to help the President usher in a new age by rigorous enforcement and funding of Dodd-Frank, such as it is, and by pressing for additional measures to close gaps in the legislation? Should a new crisis emerge, will he allow the process of creative destruction to take place with adequate systemic safeguards as proposed by Bill Black and Randall Wray? Will he permit bondholders to take the haircuts their risks and rewards warrant or will he support the big bank subsidy of implicit TBTF status?

Bill Daley, who’s your daddy?

January 4, 2011

Bank of America Settlement

Filed under: Running Commentary — thefourteenthbanker @ 11:02 AM

So what to make of the Bank of America settlement reported yesterday? At first blush, it appears to be another backdoor bailout of this TBTF bank. According to Barry Ritzholtz, the settlement amounts to 1 cent on the dollar of potential put back claims.

A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.

The stock market cheered with B of A shares up 6.4% on the day on the belief that this settlement helps “size” the remaining settlements the bank will have to make.

According to the Wall Street Journal,

…some investors wonder if Fannie and Freddie actually got the best deal possible, or where looking to help reduce the unease around mortgage-repurchase risk that has dogged financial institutions and B of A in particular.

Brian Moynihan, CEO of B of A, may have nailed it best in his cryptic statement, “These actions resolve substantial legacy issues in the best interest of our shareholders,”

Taking that at face value, B of A won the negotiation in favor of its shareholders and against the shareholders of Fannie and Freddie, that is, us.

This particular fraud is just one fraud. One of the better write-ups recently was by Zero Hedge and has to do with the representations made by B of A in the sale of MBS to Allstate, which is representative of sales of MBS to everybody under the sun. Allstate has filed suit against B of A on the basis that the quality of the securities and the mortgages in the securities was appreciably less than represented. In other words, there were already embedded losses in the securities and B of A knew it and sold it to a trusting buyer.

To sum it up, nothing new to report here.



December 27, 2010

On Corruption

Filed under: Running Commentary — thefourteenthbanker @ 11:57 AM

Perhaps it is time to explain the tone of my Holiday Greeting, in which I expressed optimism.

Happy Holidays to all. It has been an eventful year. This is the season of hope and, despite all the matters that we have criticized over this past year, I am full of hope. There are well-meaning people all around us. Those that are not well-meaning, are generally uninformed, misinformed, or unskillful in their thinking. All of these things can change. We are in an evolutionary process. At times it will seem like we are stepping back. Yet we are moving forward.

While I have been enjoying the presence of friends and family and relaxing in the spirit and ambiance of the season, the media and blogosphere have continued to do heavy lifting.  We will get to that in a minute.  But first, my reason for optimism. Given the religious nature of Christmas itself, it is entirely appropriate to look to our spiritual traditions to consider the circumstances of our present day. The trend that encourages me has been a theme of all major spiritual traditions, which emphasize the ideas of “light” and “truth” as essentially redemptive. They are redemptive in our present day lives in two ways. The first is that the realization of truth is essentially healing inwardly (spiritual world). The second is that the truth moves us to action and provides impetus to heal ourselves and others outwardly (material world). And these two are synergistic. Inward strength enables outward action.

(As an aside, I would invite readers to share along these lines from their spiritual traditions or personal reflections)

So while I have rested, others have reported. The steady exposure of corruptions in our system, the light that shines unwavering on the regimes of corruption, will have its effect. There is developing a common understanding that the system we have today is broken and that we must find the means to make it constructive.  Here are some of the worthy stories of the last 10 days.

First off, on the theme of corruption, it would be silly to assume that they corruption we see in the financial system is anything other than a reflection of the corruption of power more generally. Here are two examples. In this first, it is reported that the revolving door between government and industry is as active in the realm of the military as in the financial realm. The Boston Globe highlights that the normal path for retiring senior military officers, whose pensions are already generous, is to go to work in influential and non-transparent ways for defense contractors.

The Globe analyzed the career paths of 750 of the highest ranking generals and admirals who retired during the last two decades and found that, for most, moving into what many in Washington call the “rent-a-general’’ business is all but irresistible.

From 2004 through 2008, 80 percent of retiring three- and four-star officers went to work as consultants or defense executives, according to the Globe analysis.

The article goes on to illustrate how these retiring officers have inside tracks into the Pentagon and wield influence without disclosure of their financial conflicts of interests. This does remind me of one aspect of the banking business, which is that “don’t ask, don’t tell” is much more than a policy regarding gays in the military. It is the practice of people who know that there are ethical issues or conflicts of interest and consciously choose to do nothing about them because of mutual benefit.

A second example of corruption generally is in relation to academia and industry.  This is a video interview so I can’t quote it here, but the gist is that economists that opine on regulatory matters, have undisclosed financial conflicts of interest with the companies that would be affected by regulation.

Another outstanding piece from recent days is this written interview with Bill Black, from Parker and Spitzer. It is succinct and readable. The emergence of Black as a very articulate and visible critic of the culture of fraud is significant. One feature of our system of media is that for messages to get out, they have to be repeated over and over. Many academics do their research, publish a paper, perhaps write a book, and then their voice fades. Black is showing an endurance which provides hope that he can move the needle of perception. What is different about Black’s approach is that he is very clear and specific in his charges. He does not generalize. He is very specific about how certain frauds work. This will make general denials less effective.

There was also a meaningful judicial ruling against Wells Fargo. Hat tip Naked Capitalism.

What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. It is unusual to award the payment of the plaintiff’s attorney’s fees, or to order disgorgement of fees paid for services (the other component of the additional $15 million plus is interest on the $29.9 million). The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the Minneapolis Star Tribune (hat tip reader Ted L):

The judge said that the nonprofits’ lawyers, led by Minneapolis litigator Mike Ciresi, provided a “public benefit” by bringing the bank’s wrongdoing to light. Thus, Monahan said, the bank must pay the plaintiffs’ attorneys fees and costs, which Ciresi’s firm estimated at more than $15 million…

Terry Fruth, a Minneapolis attorney who has been watching the case closely on behalf of his clients, said Monahan’s post-trial order could help other investors prove similar claims against the bank.

“The judge didn’t just find that Wells Fargo acted with disregard to the rights and interests of the particular plaintiffs,” Fruth said of Monahan. “He said the way it ran the program was with disregard to the rights of the customers. … He has made a finding that is going to bind Wells Fargo in other cases.”

The judge also seems to understand full well how banking works in America:

…Wells Fargo Chairman and CEO John Stumpf and retired Chairman Richard Kovacevich… said they knew nothing about problems in the securities-lending program in 2007. Stumpf said he didn’t know the bank even had such a program.

Monahan said that he found the executives’ statements “to be almost childlike” and that he accepts “that one of the primary functions of subordinates in today’s corporate America is to shield their ultimate superiors from accumulating embarrassing information….

“Wells Fargo was fully aware of the increased risk it was injecting into the securities lending program, that its line managers were not reasonably managing that risk, and that its actions and inactions had the potential for inflicting enormous harm on plaintiffs.”

When the program got into trouble, the judge said, “Wells Fargo’s attitude and conduct … was primarily to shield itself, and its favored customers, from the consequences.”

The judge made very astute observations about how business works these days. Executives create the environment in which unethical business practices can flourish, but want to keep a level of plausible deniability. That is a pretense.

Finally for today, this article about how the FinReg was effectively diluted. The source is a Barron’s article but Yves Smith provides the commentary. Here’s a quote to whet your appetite.

But since there has been a singular lack of appetite to do adequate forensics into what caused the crisis, since it might prove to be embarrassing to people still in powerful positions, regulators can follow the inertial course of listening to the palaver that the financial services industry puts forward to allow it to continue looting.

So back to my original premise, all this bad news is reason for hope, in that it shines light in dark, hidden places. This light will shape the common understanding, and the common understanding will shape future choices. However, it will be up to us to make those choices. If there is any unifying theme to these articles, it is that those in positions of power are not the ones that will support change in the system. Rather change in the system can only come through action on the part of the vast majority of citizens who do not have a stake in the status quo.




December 24, 2010

Happy Holidays!

Filed under: Running Commentary — thefourteenthbanker @ 8:51 PM

Happy Holiday’s to all. It has been an eventful year. This is the season of hope and, despite all the matters that we have criticized over this past year, I am full of hope. There are well-meaning people all around us. Those that are not well-meaning, are generally uninformed, misinformed, or unskillful in their thinking. All of these things can change. We are in an evolutionary process. At times it will seem like we are stepping back. Yet we are moving forward.

December 18, 2010

Wikileaks Puts the Lie to Myth of Liquidity

Filed under: Running Commentary — thefourteenthbanker @ 6:59 PM

As I have blogged about the last couple times, the never-ending bailout serves the purpose of transferring wealth into the banking system in order to prop it up, prop up the markets, and prop up the economic power structure. I think that has been fairly obvious. Today we have a “smoking gun”, released with the Wikileaks cables. Hat Tip to Credit Writedowns.

From the WikiLeaks cables as published in the Guardian today regarding a meeting with the US Ambassador to the United Kingdom and the Bank of England Governor Mervyn King on 17 Mar 2008:

Systemic Insolvency Is Now The Problem


2. (C/NF) King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.

Unblocking Illiquid Mortgage-Backed Securities

——————————————— –

3. (C/NF) King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs.

What does this prove? That it was widely known in government circles by the time Bear Stearns went bust that the global banking system was effectively insolvent – and that banks’ unloading garbage assets at inflated prices was seen as critical in preventing the whole global economy from collapsing. It’s good to see this confirmed in writing.

Read the rest of the Credit Writedowns post. I don’t need to steal their thunder. Suffice to say that the Emperor of the Treasury has no clothes.


December 17, 2010

Sell Your Soul To The Devil This Christmas

Filed under: Running Commentary — thefourteenthbanker @ 9:47 AM

Krugman and Ritholtz are singing from the same songbook today.  Ritholz points out that the subprime debacle was a creation of Wall Street, not caused by Federal Government housing policies, per se.

Federal Reserve Board data show that:

-More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
-Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
-Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

Krugman points out the disinformation campaign that is going on in his post on the Wall Street Whitewash.

It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”

When Democratic members refused to go along with this insistence that the story of Hamlet be told without the prince, the Republicans went ahead and issued their own report, which did, indeed, avoid using any of the banned terms.

And to add a timely note on the incoming legislative power shift, this one says it all.

Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

Maybe it is time to buy bank stocks for the short ride, if you don’t mind selling your soul.




December 15, 2010

That Didn’t Take Long

Filed under: Running Commentary — thefourteenthbanker @ 5:59 PM

Two days ago I posted on some comments I heard on C-Span about the Fed taking on interest rate Tail Risk. The particulars were that if rates jumped 25-50 bps, the market value of the Fed’s holdings would drop by a sufficient amount to wipe out their capital.  Yesterday rates jumped, and Zero Hedge posted this.

Today we get a brief glimpse of what will happen to the Fed’s balance sheet when rates surge. In the span of one day, the Fed took an $8 billion unrealized loss on its $1.07 trillion in Bonds, TIPS and Agencies. It also likely experienced a comparable loss on its MBS portfolio. It’s a good thing the Fed has $57 billion in capital accounts. Which means 4 days like today, and all of the Fed’s equity buffer is wiped out. What happens next is up to congress.

Today rates jumped again on the long end of the curve with the 30 year Treasury jumping 8 bps and 10 years jumping 5 bps.

The Fed does not mark-to-market, so it is not insolvent.  But, it bought these assets at market value at times when it was working to suppress interest rates and therefore prop up bond prices.  With rates moving, the assumption of this risk is panning out as planned. It is an unaccounted for gift to those from whom the bonds were purchased.


December 13, 2010

Why Would The AEI Say Today the Federal Reserve Close To Insolvent?

Filed under: Running Commentary — thefourteenthbanker @ 3:10 PM

I was listening today to several American Enterprise Institute fellows on C-Span.  They were discussing the recent revelations about the Federal Reserve programs and under what conditions the Federal Reserve might be considered insolvent.  Isn’t it remarkable that such a conversation would even take place?  The discussion was theoretical in that it is an accounting question. The Federal Reserve does not have publicly traded stock to serve as a barometer of its health. It does not have debt rated by anybody to help people understand the strength of it’s balance sheet (BS).

We do however know something about its assets and its financial statements are public. The speakers basically had two points to make in the segments I listened to.

First, the Fed does not mark its holdings to market.  We do not really know what they are worth today or at a future point in time.  Perhaps these holdings are not so far underwater on a market value basis to make the Fed insolvent if marked to market today. In any case, the incestuous relationship with the rest of USG means that the cross guarantees of Fannie, Freddie, and others protects the Fed’s assets to some extent. Of course, those guarantees are dependent on the borrowing ability of the US Treasury, which these days requires the monetization of debt by the Fed, the largest holder of Treasury debt in the world. So that all sounds pretty good.

The second point is that in taking on this TRILLION plus in MBS, the Fed has taken on a huge tail risk in that should interest rates rise, the bonds cannot be sold for as much as they can in today’s, or three weeks ago’s bond market. The AEI estimates that a 50 bps rise in interest rates across the yield curve would make the Fed insolvent on a mark to market basis.  That may be as little as a 25 bps rise today. But so what? The Fed does not have to mark to market.

I guess my point is this. The Fed intentionally took on assets that create mark to market accounting solvency risk in a sufficient amount that a little tick up in interest rates makes those bonds worth sufficiently less to negate all the capital at the Fed. It took on a massive Fat Tail risk in these asset purchases? Why? To transfer wealth to the sellers of this paper, be they US banks, foreign banks, foreign governments. It was a transfer of wealth for the purpose of saving the financial system upon which the wealthy depend.

“Heckuva job, Bennie!”

December 9, 2010

Free Market Upside Down

Filed under: Running Commentary — thefourteenthbanker @ 6:25 AM

This article by Michael Hudson (h/t Zero Hedge) does a nice job of discussing the hijacking of the notions of Free Enterprise or Free Markets. The context is a discussion of the Deficit Reduction Commission and the implication that there are commonly held beliefs about what is the nature of the free market. The general discussion is worth reading, but the highlight for me, which also relates to the just negotiated tax break extensions, is this discussion on financing in times of war.

Smith: Wars should be financed on a pay-as-you-go basis, not by borrowing
If the shade of Adam Smith were to reappear today, he would be equally disturbed by the failure of the Bowles-Simpson commission to address the issue of war debts dealt. Smith’s argument against waging foreign wars was basically an argument that they were not worth the debt burden and the associated taxes to pay interest on it. These payments transferred income from taxpayers to creditors – largely foreign creditors, the Dutch in Smith’s day, Asians today.

Neither Bowles-Simpson nor President Obama acknowledge the extent to which the federal debt – and indeed, most of America’s rise in foreign debt for decades on end – has stemmed from overseas military spending. During the Vietnam War years of the 1960s and ‘70s, the military deficit accounted for the entire rise in U.S. foreign debt, as private sector trade and investment was exactly in balance.

Smith wrote that even a land tax could not finance governments or “compensate the further accumulation of the public debt in the next war.” His argument was that to free the economy from taxes, nations should avoid wars. And the best way to do this was to wage them on a pay-as-you-go basis. Borrowing rather than taxing led the population not to feel the real cost of war – and thus deterred it from making an economically informed choice.

So the Bush-Obama administration has taken a fiscal stance diametrically opposed to that of the patron saint of free enterprise. While escalating war in Afghanistan and maintaining over 850 military bases around the world, the administration has run up the national debt that Smith decried. By shifting the tax burden off property and off rent-seeking monopolies – above all, off the financial sector – this policy has raised America’s cost of living and doing business, thereby undercutting its competitive power and running up larger and larger foreign debt.

Robert Reich also has relevant commentary that provides some statistical information that is relevant to Hudson’s article.

Here’s the real story. For three decades, an increasing share of the benefits of economic growth have gone to the top 1 percent. Thirty years ago, the top got 9 percent of total income. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged.

The policy positions taken by the USG in continuation of the policies of the last couple decades and most recently in a bow to the Republican wave, do not represent free market principles. Free market principles would not allow a combination of government policies and market abuses to concentrate wealth so much at the top of the spectrum that the vibrancy of the economy and the engines of small business growth are in permanent peril. A free market would permit creative destruction, promote competition, break up oligarchy and give the average citizen a fighting chance.



December 6, 2010

Bank Capital Discussion

Filed under: Running Commentary — thefourteenthbanker @ 12:49 PM

Simon Johnson has an excellent post on Baseline Scenario regarding the debate about bank capital. This debate is often in the background because there is a prevailing assumption that  super high leverage is and should be the norm for financial services. Why?

The debate in the last week became higher profile as a result of a piece on Jamie Dimon in the New York Times Magazine. Check out that cover. In the piece, Dimon is framed as a competent and reasonable man. He sounds reasonable. What he says is reasonable from within the paradigm he lives.

An example:

Dimon does not dispute that mortgage lenders and investment banks deserve a lot of the blame. But regulatory lapses and excess leverage throughout the system, he says, contributed as well. What gets him riled is his sense that Washington is captive to a binary, us-against-them environment in which bankers are cast as villains. Perhaps naïvely, he was disappointed that political concerns played a large role in shaping the legislation. (An example is that Dodd-Frank limited bank investment in hedge funds, even though the latter were peripheral to the crisis.) In contrast, Dimon admires the approach of the members of the Basel Committee, the international regulators who are imposing heightened capital requirements, because they are asking the questions that, in theory, bankers ask of themselves: how much capital do banks need to withstand the inevitable downturn, and what is an acceptable level of risk?

Basel is a very minor tweak in capital requirements. Simon Johnson’s take?

There is one problem, however. Basel may have asked the right question, but it did not come up with the right answers, mainly because it allows banks to remain dangerously leveraged, setting equity requirements way too low.

My beef is with the way the argument is conducted. This has become typical in our media bite culture. Make a quick assertion, repeat it endlessly, and people buy it. Here is the argument bankers are making about capital, in Simon’s words:

Bankers tell us that they must be allowed to maintain high leverage because this is part of the business of banking. They assert that economies will suffer if they are made to fund more of their investments with equity, there will be credit crunches, terrible things will happen. We clearly must examine these statements carefully before agreeing.

To summarize Simon’s point, he is saying that high leverage is a result of a combination of government policy that promotes leverage in a variety of ways, such as regulation, the tax code, implicit guarantees for TBTF institutions, and private interests that benefit from leverage because of the large profits and compensation it can bring to bankers and shareholders. I agree with Simon on this. The leverage that exists in the system is natural because of the assumptions that all of us are operating under. If you throw out the assumption that high leverage is the norm, is necessary for the economy, and that reducing leverage will cause a crisis, than you are no longer bound by the logical end point of those assumptions, which is to not rock the boat. You can ask, “why”? And you can realize that there are alternatives.

The existing banking system will persuasively argue its book every time. That does not mean anyone else has to buy it. If there is to be a banking model that is less leveraged and produces less fragility for the system, society has to choose it.

December 2, 2010

Fed Document Dump First Step To End American Deceptionalism

Filed under: Running Commentary — thefourteenthbanker @ 10:26 AM

According to the Wall Street Journal’s very abbreviated reporting on the document dump, the Federal Reserve’s loans at the depths of the crisis included the following:

  • Goldman Sachs borrowed from the Fed 84 times, to a maximum single amount of $18 Billion.  This would be in addition to the TARP bailout funds of $10 Billion and a pass through of bailout money from AIG of perhaps $12.9 Billion.
  • Morgan Stanley borrowed from the Fed 212 times up to $60 Billion. Morgan’s TARP bailout was $10 Billion
  • JP Morgan borrowed $17.7 Billion in addition to its TARP bailout of $25 Billion, and AIG pass through of some amount (they are lumped into “other”)
  • Bank of America borrowed 118 times ranging up to $11 Billion in addition to its TARP bailout of $15 Billion and Merrill’s $10 Billion, and their combined AIG pass through of $12 Billion.

There is better reporting on Huffington Post with what appears will be a live stream of updates.

  • Huffington highlights the extreme favorable terms these loans were made on.  The annual interest rate for emergency borrowing was 1/10 of 1%.
  • 18 Primary Dealers on Wall Street pledged $1.3 Trillion in non investment grade paper to secure Fed borrowings.  Rates on these loans were 1/2 of 1% per annum.
  • Nine large money market managers tapped the Fed for a total of $2.4 Trillion

Here is a graphic of the AIG pass throughs.

So these are a few highlights. What is obvious is that yes, the entire system would have collapsed without a bailout or a resolution authority and there was no time to set up a resolution authority. These firms had to borrow money from the Fed despite the fact that all other firms were borrowing from the Fed and were therefore able to make good on their interbank borrowings, counter party positions, and collateral postings. Even JPM and Goldman chose to borrow even while their clients were being propped up by the Fed. So they were all over leveraged and they were all short cash.

So call it what it is.  Wall Street on the dole. This money was cheap, almost free. For comparison’s sake, Warren Buffet invested $5 Billion in Goldman Sachs. This was equity, not debt, and was not secured. So it is not exactly comparable. But Warren negotiated a return of 10% per annum and the right to buy $5 Billion of stock at $115 per share. The profit on the stock was not locked in and I’m not sure what he did with it, but the price of Goldman stock today is $158. So if he flipped it today he would flip 43 million shares at a profit of $43 per share.  That is another $1.86 Billion in compensation. So it looks to me like that Goldman money would have cost about 25% per annum.  This is very rough math but you get the point. Less than 1% per annum paid to the Fed is a direct subsidy.

So what does that mean for today? It means these banks, their shareholders, and their bondholders owe the American people for their existence. They should act like it.




December 1, 2010

Fed Release Coming – Fed Hunter Matt Stoller Is On The Job

Filed under: Running Commentary — thefourteenthbanker @ 9:40 AM

At noon today the New York Federal Reserve Bank will release its bail out data. It is good to know that Fed Watchdog Matt Stoller is on the job.  He has this quality piece today on Naked Capitalism and will be examining the report and bringing us analysis. Here is a teaser:

This is a tremendous step forward. Of the many castle walls the Fed used to keep the rabble out, secrecy and complexity were critical. The Fed couldn’t keep its dealings secret, and financial bloggers are constantly explaining, explaining, and explaining. Those walls have fallen. A lack of public debate was another. That too has fallen. A monopoly of public information dissemination, via personal contacts between bankers and outlets like the Washington Post (whose owner in the 1930s was Hoover’s Federal Reserve Chairman), has broken down as well through internet communities.

Gradually, a new generation of politicians is gaining the confidence that the people themselves through their elected representatives should be making critical decisions about economic efficiency and banking. The Fed is adapting to these changes, building up its communication staff and doing town hall style meetings. Bernanke is on TV all the time, a far cry from the days when the Federal Reserve head simply refused to even brief Congress. In some ways, the hardest part of the fight is generating public debate, but that has been accomplished. The structure of our monetary system is now up for grabs.

As we move forward in this debate, it is important to understand that Sarah Palin is coming from a genuinely rooted tradition in American economic debates, from the era of the late 19th century, when Wall Street came together to finance railroad mega-corporations. Her argument is one against the mutability of money; she rejects the idea that money is a political object, because that implies that it is collective decision-making that determines property values and ultimately the social hierarchy. She believes in a natural and fixed social hierarchy, which is a very conservative idea deeply held by the business class.

Palin is using the lack of legitimacy of the modern Fed, the failed technocratic screw-ups and the elitist tendencies, to push for the equivalent of societal debtor’s prison. She is speaking for creditors, and many of the conservative forces within the Federal Reserve agree with her. It is important to understand that reflexively defending the Federal Reserve, which is what the Democratic establishment is doing, is a foolish and anti-populist attempt to pretend that the Fed is a legitimate decision-making body. It isn’t. It is powerful, but not legitimate.

Stoller is on the right track here. The issue is power and its incestuous nature. Perhaps this information will begin to separate the populists from the populists. There is a brand on populism in ascendency that is naive. It believes that the notion of small, efficient, and non-intrusive government is necessarily democratic, and Constitutional. It can be, if it fulfills its functions relating to freedom, equality, and justice. This is where the Sarah Palin Tea Party will be tested. For if it simply suggests that government disengage and allow the economic masters free rein in a rigged marketplace, then it is not really populist at all. It will really stand for economic “exceptionalism” within our population, where some that rise to the top get to stay there by any means including by the use of some exempt and secretive arms of government.

On the other hand, as Stoller points out, there is the Ron Paul wing of the Tea Party, which does stand for equal economic opportunity.

The Fed is actually one point of contention between the right-wing billionaire Koch family and the Ron Paul libertarians; the Koch’s are supportive of Federal Reserve-tied scholars, and Paul’s people are not (the Palin tea party had no involvement in the Audit the Fed fight, the Ron Paul tea party was the driving force on the right for that legislation).

So perhaps between this release on the upcoming Wikileaks release on a major bank, if it happens, more light will be shed on the sharing of power and money by the economic elites, who prefer to bail out the richest 10% at the expense of the other 90%.  See Ireland for details.


November 27, 2010

Eyes On Ireland

Filed under: Running Commentary — thefourteenthbanker @ 1:14 AM

The Ireland EU bailout is getting panned from many sides. This article by Mish shows that he agrees with one of his favorite adversaries on this particular issue. The question is how the ordinary people of Ireland benefit from bailouts of the banking system. Things are a little more clear over there than they are over here. Ireland is a small country, most of its creditors are foreign banks, and severe austerity is being imposed by outsiders. Why?

While these considerations are not openly discussed in most media stories, the reason all parties want to bail out the banks is the same this time around as it was last time. The perceived risk is contagion and systemic meltdown of the financial system. The flame of that perception is stoked by the commercial banking industry itself, captured government officials, and central bankers.

Writer Mike Whitney has stern words concerning this bailout.

This is a black day for Ireland. The Irish people will now face a decade or more of grinding poverty and depression thanks to their venal leaders. As soon as the ink dries on the IMF loans, the second occupation of Ireland will begin, only this time there won’t be armored cars and Paramilitaries in fatigues, but nerdy-looking bureaucrats trained in the art of spreading misery. In fact, the loans haven’t even been signed yet, and already IMF officials are urging the government to cut jobless benefits and the minimum wage. They’re literally champing at the bit. They just can’t wait to get their hands on the budget and start slashing away.

And don’t believe the hype about European unity or saving Ireland. My ass. This is about bailing out the banks. The bondholders get a free ride while workers get kicked to the curb. Here’s a clip from the Financial Times that spells it out in black and white:

“According to data compiled by the Bank of International Settlements, the three largest creditors to the Irish economy at the end of June…were Germany to the tune of €109bn, the UK at €100bn and France at €40bn. These sums amount to 2 per cent of France’s gross domestic product, 4.5 per cent of Germany’s GDP, and 7 per cent of British GDP.”

Ireland is being asked to cut to social services, slash wages, renegotiate contracts, and dismantle the welfare state so that undercapitalized banks in France and Germany can get their pound of flesh. But, why? They’re the ones who bought the bonds. No one put a gun to their head. They knew they could lose money if Irish banks went south. That’s the risk they took. “You pays your money, and you takes your chances.” Right? That’s how capitalism works.

Not any more, it doesn’t. Not while Cowen’s in charge, at least. The Irish PM has decided to bail them out; make all the bondholders “whole again.” But who made Cowen God? Who gave Cowen the right to hand over his country to the IMF?

No one. Cowen is a rogue agent kowtowing to international capital. After he finishes his work in Ireland, he’ll probably join globalist Tony Blair on the French Riviera for a little hobnobbing with the tuxedo crowd.

The Irish people didn’t struggle through centuries of famine and foreign occupation so they could be debt-peons in the EU’s corporate Uberstate. Like Sinn Fein president Gerry Adams said, “We don’t need anyone coming in to run the place for us. We can run it ourselves.” Right. Tell the EU plutocrats to take their Utopian Bankstate and shove it.

I also fail to see how holding bank bondholders harmless while severe austerity is imposed on a general population is not disproportionate central decision-making to benefit the few at the expense of the many. Risks were taken for profit. The losses should not be socialized. Granted, if the banks were suddenly insolvent, the ramifications for the economies would be severe. However, if as Bill Black has suggested in his recent writings, resolution authorities stood ready to continue business operations and a true free enterprise system had fresh private capital ready to step into the breach, the dislocations could be manageable. But we do not have a true free enterprise system here in America or in the West in general. We have oligarchy, plutocracy, corporatism, etc. It is vested interests that stand in the way of creative destruction. To prepare any economy for financial transition where old institutions die a natural death and new ones arise from the ashes requires a democratization of both politics and business. I see few leaders prepared to lead that democratization. In fact, here in the U.S. the protectors of the banks are still ascendant. This protection actually prevents the development of a cure. For surely the cure is not more of the same.

So today it is austerity for Ireland, Greece, Latvia, soon Spain and Portugal. When will it be America’s turn?

November 22, 2010

Where Do We Turn?

Filed under: Running Commentary — thefourteenthbanker @ 10:57 AM

This apt question, from commenter Sandi, is a timely one. On viewing the movie, Inside Job, Sandi finds the entire system corrupt because the supposed educators and advisors to Presidents are on the corporate dole. The beauty of an on camera interview is that the real person cannot be so easily hidden.

Our half dead populace, drunk on Dancing with the Stars, probably has no desire to turn anywhere or do anything. But a few posts from last week indicate rising awareness of the screw job we are all getting.

FDR Wasn’t FDR…Until His Hand Was Forces By Civil Disobedience

A Debtcropper Society

There are solutions to this mess. Perhaps our inspiration will come from abroad. Perhaps the civil disobedience or political insurrection in other countries will lead to an awakening in ours. We do not have to degenerate into anarchy to bring change, but we do have to act in some manner. Right now there are too few people acting. I’m thinking of pulling my money on December 7. That will only be symbolic and nobody will notice. But it is one small defiant step. Then I will take another one, and another one, until it is the path I walk.



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